January 15, 2008

Corporate Formation Issues For Internet Entrepreneurs

Anyone beginning a new business venture or is doing business as a sole proprietorship should consider forming a limited liability company (LLC). Business formation is an important decision. The limited liability company is a blend of the best characteristics of corporations, partnerships and sole proprietorships with liability protection for the owner or owners. Listen to Traverse Legal Attorney Mark Clark in this radio interview as he discusses the reasons entrepreneurs might consider creating a limited liability company and its benefits such as the simplicity of operation, tax advantages and personal protection that it provides to the small business owner in Michigan and nationwide.

DAMIEN: Good morning and welcome to the VTalk Radio's Tech Spotlight. My name is Damien Allen and today we are in the field in the offices of Mark Clark, attorney for Traverse Legal. Mark is going to be discussing LLCs. Limited Liability Companies. Welcome to the company this morning, Mark.

MARK: Good morning, Damien.

DAMIEN: Well, we're talking about LLCs. What is a Limited Liability Company, Mark?

MARK: Well, Damien, a Limited Liability Company or what is more commonly referred to out in the public as an LLC is a business entity. Similar to a corporation or sole proprietorship or a partnership, but it has some features that may be more beneficial. As the name suggests it is a limited liability company. What that means is that you can create for your business this type of a business entity and limit yourself from liability. Really there are two types of liability that people who own and/or form businesses are concerned with. Those are protecting themselves from liabilities such as a casualty liability where for instance in the course of your business you cause or create a car accident and you have inadequate insurance. What you've done then is you've created a business entity to take the liability exposure from that event. The more common reason that people would want to form a limited liability company or LLC is to protect themselves from business debt. If for whatever reason the business is not doing well, or ultimately fails for instance, the individual is protected from paying the company's debts and obligations in the event of a business failure.

DAMIEN: What are some other reasons that someone would want to create a limited liability company?

MARK: The most common candidate for a limited liability company is a small business or a family business. It used to be, Damien, more than ten years ago...there was really only one option for forming a business entity to protect yourself from liability and that was the corporation. Now the corporation is a little bit more complex. It involves the issuance of shares of stock and the creation of boards of directors and officers and it was very cumbersome or difficult for the small business owner or the family owned business to operate in that type of a business structure. Now the limited liability company has been around for more than ten years, but about ten years ago or so the IRS came down with a revenue ruling which made it clear that this more informal type of organization was going to receive the same type of beneficial tax treatment that an S corporation had. And that is that income that you generate will flow thru to you individually and not be taxed twice. A limited liability company is less formal than a corporation. It operates more like a partnership and a limited liability company is created and formed by essentially creating a document that is much like a partnership agreement. It is very flexible and it can be created to suit the individual business owner’s needs. You're not stuck with what the laws used to provide for which was essentially a corporate form of business entity.

DAMIEN: We are in the field today speaking with Mark Clark, attorney at Traverse Legal. We're discussing limited liability companies. We're going to take a short break for these commercial announcements, and we'll be right back.

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DAMIEN: Welcome back to the VTalk Radio's Tech Spotlight. I'm Damien Allen, and again we are in the offices of Mark Clark, attorney at Traverse Legal, and we're discussing limited liability companies. Welcome back to the program, Brian.

MARK: Thank you, Damien.

DAMIEN: Now we've been discussing what it takes to form a limited liability company and what it is. How many members does it take to form an LLC?

MARK: Damien, it used to be that it took two or more members to be eligible to form an LLC, but in recent years, again the IRS has come out with some favorable rulings that make it available to a single person. So rather than being a sole proprietorship under a d/b/a, for instance, an individual who owns a business can start a limited liability company or LLC. There is no limitation on how many members can participate in a limited liability company, but generally the smaller businesses with less owners are the most suitable candidates for a limited liability company.

DAMIEN: Now, I personally hold a d/b/a. What are the benefits of holding a d/b/a as opposed to an LLC or to juxtapose what's the benefits of holding the LLC instead of the d/b/a?

MARK: That's a good question, Damien. The primary benefit is really what we talked about at the outset of our discussion which is a limited liability will limit your liability exposure for general liability issues as well as debt that the business may incur at a later point in time. If you are operating under a d/b/a as a sole proprietor, and your business runs into a bump in the road and there are debts that are unpaid, you would be personally liable and would be exposed personally to pay those debts and obligations of the business. The limited liability company would be the one in the case of the formation of a limited liability company would be responsible for those debts, obligations, or other liabilities of the business. So that's the primary benefit; to protect your own personal exposure in the business world.

DAMIEN: What types of provisions can go into a limited liability company operating agreement?

MARK: Well the operating agreement of the limited liability company, Damien, is really the road map of how the business will operate. The beauty of a limited liability company form business ownership is that it can be generally tailored to suit the needs of the individual business. For instance, the operating agreement of a limited liability company will dictate how many members there are, what percentage of ownership those individual members hold, whether the individual members will be voting according to their percentage of ownership or some other form that the members can dictate and incorporate into their operating agreement, and other items such as being able to sell or assign your membership interest. For instance, the members may want to restrict who they allow into their business operation and may want to place restrictions in the operating agreement that would either prohibit or restrict members from selling their interest to just anybody without a vote of the membership.

DAMIEN: What types of businesses should consider the limited liability form of organization?

MARK: Generally, Damien, smaller businesses and again sole proprietorships are good candidates for the limited liability company form of business ownership. Also professionals are good candidates to have limited liability companies. At Traverse Legal we are a professional liability company and our form of business is in the form of limited liability company. Generally smaller businesses that aren't suitable for the cumbersome form of business entity such as a corporation are the best candidates for a limited liability company or LLC.

DAMIEN: What advice do attorneys provide to someone thinking about forming a limited liability company?

MARK: Damien, your attorney can be a good source of advice and information concerning what types of provisions you would want to incorporate into your operating agreement when you form a limited liability company. We talked about some of those a little bit earlier, but to have a thorough discussion with your attorney can help you understand and highlight some of the issues that you may not have thought of when you go to form your business operation. Some of those things, and I think an important one that we touched upon earlier is what type of exit strategy do individual members have or should they have when they want to leave the organization for any reason. Those are the types of provisions that an attorney can assist you with in developing a proper operating agreement for your business.

DAMIEN: How is the limited liability company created in Michigan?

MARK: Damien, a limited liability company is created by filing Articles of Organization with the state of Michigan. The form is filed with the Department of State and then you are officially organized as a business entity in Michigan. The other thing that you'll need to do if you're going to form a limited liability company is apply to the Internal Revenue Service for what they call an employer ID number. You often hear of it as an EIN number or 38 number. That allows you to file an income tax return and open bank accounts under the name of your limited liability company. The important document that you'll need when you create your limited liability company is an operating agreement. The operating agreement is simply those provisions that you incorporate into an agreement that is a road map of how the business entity will operate. How many votes it will take to discuss and decide certain items. Whether there's restrictions placed on selling the business for instance or transacting certain business and really it's whatever provisions the owners or members of the company wish to incorporate to establish the ground rules for operating the business.

DAMIEN: Now as an LLC when this LLC is created, does it become an entity under it's own and credit lines and existence or does it fall under the jurisdiction of the collective members of the LLC?

MARK: That's a good question, Damien. It falls, generally, under the LLC, and again that's why you would form an LLC or a limited liability company and that is to limit your exposure for things such as debts. Now that's not to say that your lender or banking institution might not suggest or attempt to have you sign personally for any extension of credit or loans that you may receive, but generally you should try and avoid signing personally, because it does defeat the purpose for which you're forming the LLC which is to limit your exposure.

DAMIEN: Thank you very much for discussing this topic with us today, Mark. We're learning a lot about the limited liability company today on VTalk Radio's Tech Spotlight. Once again, we've been speaking with Mark Clark, attorney at Traverse Legal. Thank you for joining us today, Damien, I enjoyed it.

DAMIEN: You have been listening to the VTalk Radio Tech Spotlight. I'm your host, Damien Allen. Have a great afternoon.

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